The Euro has sunk to a 20-year low against the Dollar this week as energy prices continue to soar, threatening a sharp downturn and winter crisis for much of Europe.

Yesterday saw both gas and electricity climb to record highs, with the latter rising by a worrying 25% in one day alone. Heatwaves across Europe for much of the summer have increased energy demand, while low wind and water levels also reduced output.

Concerns over gas supplies from Russia have been present since March, but were renewed following an announcement from Russia that Nord Stream 1 pipeline supplies would be halted for three days at the end of the month for maintenance. All eyes will be on supplies and whether they resume after the maintenance is completed, and could fuel further rises should Russia decide to keep supplies off.

230822 Euro Chart

Euro vs Dollar chart – source XE.com

Several European countries have already warned of potential blackouts in the winter as demand increases only further, and business have been encouraged to restrict energy use as much as possible. With factories halting production this will of course further restrict supply of their products, adding to already high producer inflation.

Indications of recession are already beginning to show, and with energy prices climbing to all-time highs many people in the UK and EU with have little choice but to severely cut back on spending in every aspect of life. Without further government support however, many will be stretched beyond their ability to manage. Any increase in government index-linked debt will also be more expensive with inflation so high.

Recent forecasts for the UK suggest inflation could hit 18% next year as energy prices continue to rise over the winter and into the new year. Interest rates have already begun to rise but may have much higher to climb if they are to have any impact on such high inflation.

This is of course the calculation being made by markets right now, who are confident the US will continue to hike rates aggressively. This has pushed the Dollar Index to near 20-year highs, as investors look (perhaps unwisely) for a safe haven in the world’s reserve currency.

The strength of the Dollar is still keeping the gold price subdued, but demand remains strong from both private investors and central banks. With an energy crisis and protracted recession looking likely in the winter however, this demand is expected to rise further.